You receive a tax refund when you overpaid your taxes for the previous year and the government is returning your money. Even so, receiving a lump sum all at once can feel like finding money, which may lead you to splurge on something you’ve been eyeing, such as a pair of shoes or an expensive gadget, instead of putting it toward smart financial moves.
While there is nothing wrong with treating yourself, you might be able to use the refund to achieve more useful financial goals. Here are four smart financial moves you can make with a refund.
1. Make a Responsible Purchase
Is your dishwasher acting up? Do you need new tires for your car? Do you have children in daycare? Consider using your tax refund to pay for a service or purchase you already need but would have spent your bank account’s cash otherwise. As a result, you will not feel the pressure you would have felt later if you had made the purchase with your normal income.
2. Pay Off Debt
It’s a good idea to pay down your debt whenever you can. If you pay more than the minimum payment on any debt, whether it’s a credit card balance, a mortgage, a student loan, a car loan or any other type of debt, you’ll reduce the balance and save money in interest. Consider using your tax refund to take a bigger bite out of your debt.
3. Increase Your Emergency Fund
It is important to have an emergency savings plan to protect yourself from financial disasters in the event of a job loss, a car breakdown, a broken appliance, or a medical expense. If that seems too difficult, it is still helpful to have something in the bank for emergencies. It is generally recommended to save three to six months’ worth of expenses.
If your emergency savings fund isn’t where you want it to be (or if you don’t have one at all), you can use your tax refund to boost your savings and protect against future financial emergencies.
4. Invest
Are you saving for retirement with an IRA? Do you use a 529 college plan to save for your child’s education? What about stocks? If not, do you want to? You won’t even receive enough interest on your tax refund to keep up with inflation if you park it in an average bank account. You can put it to use by investing, which can earn you a higher return and even provide you with tax benefits in some cases.
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